Acquiring commercial property from related party

SMSF may purchase a property that is used wholly and exclusively by a business from a member of the SMSF or related party. The acquisition must be on arm's length basis, and at market value.

The SMSF may acquire the business real property from the member in the form of an in specie contribution, that is, instead of the SMSF paying for the purchase, the purchase amount or part is treated as contribution by the member.

The property may be leased to a business related to a member of the SMSF or related party on arm's length terms, including the amount and frequency of rent payment. There must be a written lease agreement.

The property may be purchased with borrowings from a limited recourse borrowing arrangement.

This may be an attractive option for business owners:

• who currently owns or another related entity owns a real property that they run their business from to 'sell' the property to their SMSF. This allows for the business owners to 'cash out' their property, but still own it within their SMSF. The SMSF will lease the property to their business. There may be capital gains tax concessions and/or stamp duties concessions on the transfer of the property to the SMSF.
• build their retirement savings by transferring the business property, or part of the property, to the SMSF in specie (up to cap amount) and their business pays rent to their SMSF.
• as a strategy to have real property in their SMSF by purchasing a real property to run their business from. The SMSF will lease the property to their business.

In certain States or Territories, in certain circumstances, the SMSF may qualify for stamp duty concessions on the transfer of the real property to the SMSF. Legislations and concession, if available, varies by States and Territories. Accordingly, you should check with the relevant State Revenue office.

What is a business real property

Real property that meets the definition of 'business real property' at the relevant time can be acquired by the SMSF from member of the SMSF or related party.

The test requires that the property be used wholly and exclusively in one or more businesses. The business does not need to be the member's business.

The relevant time for applying the business use test takes accounts of all of the circumstances associated with the use of the property surrounding the time at which the business real property definition is applied.

What is the market value

'Market value' is defined as:

the amount that a willing buyer of the asset could reasonably be expected to pay to acquire the asset from a willing seller if the following assumptions were made:

1. that the buyer and the seller dealt with each other at arm's length in relation to the sale;
2. that the sale occurred after proper marketing of the asset;
3. that the buyer and the seller acted knowledgeably and prudentially in relation to the sale.

It is the asset's market value at the time when it is acquired. The asset is acquired when the SMSF becomes the owner of the asset.

The market value determination should be supported by a valuation report from a qualified independent valuer. They should be impartial and unbiased and not be influenced or appear to be influenced by others. The valuation report should be current. Generally, within 3 months of the asset being acquired by the SMSF. If there is a material change a more current valuation may be necessary.

We can help

Talk to us. We can guide you and provide you with advice, for example, about whether your property will meet the business real property test. We can assist you with setting up the right structure if you are funding it with borrowings in the SMSF.

Reference materials
ATO SMSFR 2009/1
ATO SMSFR 2010/1